Asset-Based Approach
Core concepts
The asset-based approach values the entity as the sum of its assets less liabilities. Two variants: going-concern asset-based (assets at fair market value in continued use, including intangible assets such as assembled workforce and goodwill when appropriate) and liquidation (orderly or forced, with disposition costs). It is most relevant for asset-intensive firms, holding companies, and early-stage or distressed businesses where earnings do not support value.
Value each asset: real estate (market or cost approach), machinery (cost less depreciation, or market), receivables (collectible amount), inventory (replacement or net realizable), and identifiable intangibles (relief-from-royalty, excess earnings, cost to recreate). Then deduct liabilities at fair value. Compare the result to the income and market approaches as a reasonableness check.
Traps
- Omitting off-balance-sheet liabilities (contingent liabilities, unfunded pensions, environmental obligations).
- Double counting: including an intangible asset and also capitalizing the earnings it generates.
- Using book value as fair market value without adjustment.
- Forgetting that a going-concern asset-based value may include goodwill only if supported.
- Applying liquidation premise to a healthy going concern.
- Ignoring tax effects of asset step-ups.
Worked rule of thumb
Adjusted assets $5,000,000; liabilities $1,500,000 → net asset value $3,500,000. If the income approach yields $6,000,000, the gap likely reflects unrecorded goodwill and workforce value; reconcile rather than average blindly.
Exam strategy
Ask whether the premise is going concern or liquidation-the same assets have different values under each.